Not long after the downsizer superannuation contribution (DSC) legislation was passed, people started asking whether it made sense to sell a home purely to increase someone’s superannuation. As usual, there is no definitive answer that applies to every situation.
One point that cannot be debated is that where an individual or a couple have decided to sell their home to downsize, or because they are moving into an aged-care facility or retirement village, the ability to make a DSC is a great improvement on their options under the previous restrictions on super contributions.
Like all strategies, a great deal of analysis and many projections are required when considering whether to recommend a DSC strategy to clients.
When determining whether it makes sense to sell a home purely to make a DSC and increase the amount a client has in super, an adviser must compare this option with one of the few other alternatives available to retirees now – taking out a reverse mortgage.
One possible downside of selling a home to make a DSC is the costs of selling and purchasing. These costs must be taken into account but they must also be measured against the expense of a reverse mortgage.
Canstar Blue, a customer satisfaction research and ratings business, estimates that the total cost of repaying a $90,000 reverse mortgage loan, at a loan-to-value ratio (LVR) of 15 per cent, based on average interest rates and average fees paid, is $91,783 after 10 years, $259,431 after 20 years, and $572,131 after 30 years.
Selling costs for homes are, on average, between 2 per cent and 3 per cent of the sale value; purchase costs vary between states, but for properties under $1 million they are about 4.5 per cent. This means selling a home worth $1.5 million, and purchasing a replacement home that costs $900,000, results in a total cost of about $85,000.
If a reverse mortgage at 15 per cent LVR were taken out on a property worth $1.5 million, for a period of 20 years, the total interest and borrowing costs capitalised would amount to about $649,000. Comparing this with a DSC of $600,000, that earns an average income of 7.7 per cent, with an annual pension drawdown of 7 per cent, the superannuation would grow to about $689,000.
Another factor that should be calculated is the net effect of making a DSC on the amount of age pension that a client receives, or is entitled to receive. As a general rule, the more the assets test will affect a client, the less advantageous it is to sell a home purely to make a DSC. The following table shows that the net extra income after making a DSC varies, from $2702 up to $36,000.
| $ | $ | $ | $ | $ | |
| Couple’s combined age pension now | 34,819 | 34,819 | 33,298 | 17,698 | – |
| Assets including super now | 20,000 | 200,000 | 400,000 | 600,000 | 830,000 |
| Downsizer contribution | 600,000 | 600,000 | 600,000 | 600,000 | 600,000 |
| Total assets after contribution | 620,000 | 800,000 | 1,000,000 | 1,200,000 | 1,430,000 |
| Extra super income at 6% | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 |
| Less reduction in age pension under assets test | 18,681 | 32,721 | 33,298 | 17,698 | – |
| Net extra income after downsizer | 17,319 | 3279 | 2702 | 18,302 | 36,000 |
